The following graph shows the labor market in the fast food

The following graph shows the labor market in the fast food industry in the fictional town of Supersize City.

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

In this market, the equilibrium hourly wage is----------------------- and the equilibrium quantity of labor is----------------------workers. (Hint: Enter the quantity of labor in thousands. For example, enter 100,000 for 100 thousands of workers.)

Suppose a senator introduces a bill to legislate a minimum hourly wage of $6. This type of price control is called a ------------------

For each of the wages listed in the following table, determine the quantity of labor demanded, the quantity of labor supplied, and the direction of pressure exerted on wages in the absence of any price controls.

A minimum wage below $10 per hour in this market will --------------------.

Solution

(a) Equilibrium occurs when labor demand & labor supply curves intersect. This takes place at equilibrium wage of $10 and equilibrium quantity of labor is 150,000.

(b) The minimum hourly wage is an example of price floor (wages cannot fall below the floor price of $6).

(c)

If wage = $12, labor demanded = 135,000 & labor supplied = 165,000 [Note: Both are best visual approximations from the graph]. Since labor supply is higher, there will be downward pressure on wages.

If wage = $8, labor demanded = 165,000 & labor supplied = 1635,000 [Note: Both are best visual approximations from the graph]. Since labor demand is higher, there will be upward pressure on wages.

(d) A minimum wage below $10 will have no effect on equilibrium. This is because, price floors work only when the floor is higher than equilibrium price.